This is an editorial by Ansel Lindner, Bitcoin and financial markets researcher and host of the “Bitcoin & Markets” and “Fed Watch” podcasts.
Two forces have dominated the world economically and politically for the past 75 years: globalization and trust-based money. However, the time for both of these forces has passed, and their decline will result in a major reset of world order.
But this is not the global, Marxist kind of grand reset promoted by Klaus Schwab and those who study in Davos. It is an emergent, market-driven reset characterized by a multipolar world and a new monetary system.
Globalization is ending
The first reaction I usually get to my claim that the era of hyper-globalization is ending is casual disbelief. People have so integrated the dying global order environment into their economic understanding that they cannot fathom a world where the cost-benefit analysis of globalization is different. Even after COVID-19 exposed the fragility of complex supply chains, such as when the US ran out of surgical masks and basic medicines or when the world struggled to obtain semiconductors, people still didn’t understand the shift that was taking place.
Is it so hard to imagine that the business people who designed such fragile and complicated production processes did not properly consider the risks?
All it takes to break globalization is for the risk-adjusted costs to change by a few percentage points and outweigh the benefits. The pennies saved by outsourcing many tasks to many jurisdictions will no longer outweigh the possibility of a complete collapse of supply chains.
These concerns about fragile supply chains have not gone away with the end of the dire COVID-19 policy. Now, they have moved on to worries about trade wars and real wars. US trade sanctions against China, the Russian conflict with NATO proxy Ukraine and subsequent sanctions, the seemingly erratic US position on Taiwan, the coronation of Xi Jinping and his Marxist resurgence, sabotage of the Nord Stream, the clear fragmentation of the international consensus The UN and even the weapons of these international institutions, and more recently, the Turkish ground attack against the Kurds – all these things should be interpreted as an increase in costs.
Gone are the days when complex supply chains were robust against typical risks. The risks today are much more systemic. Sure, there were skirmishes around the world and disagreements between parliaments, but great powers didn’t openly threaten each other’s spheres of influence. The risk-adjusted costs and benefits of globalization have changed radically.
Credit does not like conflict
Very closely related to the deglobalization of supply chains is the deglobalization of credit markets. The same factors that affect the physical, risk-adjusted costs and benefits of businessmen are also felt by bankers.
The banks do not want to be exposed to the risk of war or sanctions ruining their borrowers. In the current environment of de-globalization and rising risks to international trade, banks will naturally gravitate away from lending to those related activities. Instead, the banks will finance safer projects, most likely full local opportunities or opportunities for members. The natural response of the banks to this dangerous global environment will be a credit crunch.
The deglobalization of supply chains and credit will be as closely related on the way down as they were on the way up. It will start slow, but will pick up speed. A feedback loop of increased risk leading to a shortened supply chain and less credit creation.
US dollar credit based
The most common form of money in the world is the credit-based American dollar. Every dollar is created through debt, making every dollar someone else’s debt. Printed money is out of the question in the process of granting a loan.
It is different from pure fiat money. When fiat money is printed, the printer’s balance sheet only adds assets. However, in a credit-based system, when money is printed on loan, the printer creates an asset and responsibility. The borrower’s balance sheet then has a liability and an offsetting asset respectively. Each dollar (or euro or yen for that matter) is therefore an asset and a liability, and the loan that created that dollar is both an asset and a liability.
This system works well if two factors are present. One, highly productive uses of available new credit, and two, a relative lack of exogenous shocks to the global economy. Change one of these things and a meltdown is bound to happen.
This dual nature of credit-based money is the root of both the spectacular rise of the dollar in the 20th century and the recent monetary reset. As the global trust and supply chain breaks down, the entry of assets in banks becomes more risky. Russia found this out the hard way when the West confiscated its dollar reserves held in banks abroad. How is trust possible in such an environment? When credit-based money creation is based on trust… Houston, we have a problem.
Bitcoin’s role in the future
Fortunately, we have experience with a world that doesn’t trust itself – that is, all of human history before 1945. So we were on the gold standard for reasons that included all those that bitcoins are very familiar with (very gold grades in properties that make good money), but also because it minimized the trust between great powers.
Gold lost its shell for one reason – and you’ve probably never heard it anywhere before: because the post-WWII global economic, political and innovation environment created a very fertile ground for credit. Trust was easy, the great powers were humiliated and all joined the new international institutions under the security umbrella of the U.S. The Iron Curtain provided complete separation between areas of trust economically, but after it fell, there was a period of about 20 years when the world sang “Kumbaya” because the new credit still Was most productive in the old Soviet bloc and China.
Today, we face the opposite scenario: global trust is eroding and credit has taken advantage of all the low-hanging fruit, forcing us into a period that requires neutral money.
The world will soon find itself divided between zones/alliances of influence. A British bank will trust an American bank, where a Chinese bank will not. To bridge this gap, we need money that everyone can own and respect.
Gold vs Bitcoin
Gold would be the first choice here, if not for Bitcoin. This is because gold has several disadvantages. First, the gold is owned by those groups that are losing trust in each other, namely the governments of the world. A large part of the gold is held in the United States. Therefore, the gold is unevenly distributed.
Second, the physical nature of gold, which was once a positive factor in holding promiscuous governments together, is now a weakness because it cannot be moved or tested nearly as efficiently as Bitcoin.
Finally, gold is not programmable. Bitcoin is a decentralized neutral protocol that can be used for any number of innovations. The Lightning network and sidechains are just two examples of how Bitcoin can be programmed to increase its utility.
As the globalization of trade and credit unravels, the economic environment favors a return to a form of money that does not depend on trust between the great powers. Bitcoin is the modern answer.
This is a guest post by Ansel Lindner. The views expressed are entirely their own and do not necessarily reflect the views of BTC Inc or Bitcoin Magazine.
